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This paper aims to assess the level of credit risk (from the perspective of default risk) among Polish households associated with the physical risks of climate change. In order to determine the potential impact of the physical risk of climate change on household credit risk, we conducted CAWI interviews with 1,006 borrowers residing in different Polish voivodeships (to account for heterogeneity of credit exposures to extreme weather events). According to these respondents, wildfires and storms in Poland are the greatest source of physical risk of climate change. In the event of a wildfire or storm, approximately 13% of borrowers would not be able to repay their loans while not being insured, which potentially increases banks' credit risk and exposes banks to losses. However, we find that households underestimate the credit risk that could arise from a drought. [ABSTRACT FROM AUTHOR]

Using data from 41 countries, we provide novel empirical evidence that firms' cash holdings are positively associated with their climate change exposure. This evidence is robust to different model specifications and survives a battery of tests to ease concerns related to spurious correlation and omitted variable bias. Using the release of the Stern Review as an exogenous shock to climate change awareness, we show that this association becomes significantly stronger after the release of the Review and particularly so for firms with higher exposure to regulatory and transition risk dimensions of climate change as well as financially constrained firms. Overall, results fit consistently within the precautionary motive framework and suggest that firms hold more cash to safeguard against the adverse impact of climate change. [ABSTRACT FROM AUTHOR]

This study aims to (1) explore the extent to which Australian companies respond to regulatory, physical and market risks associated with climate change, and (2) examine the impact of stakeholder pressure and corporate governance structure on the extent of corporate response to these risks. We collected survey data from 120 top risk managers of Australian companies. Our analysis shows that companies respond to regulatory risks to a greater extent than to physical and market risks. With respect to the impact of stakeholder pressure, the results show that overall, pressure from government, non-governmental organisations, competitors, and the media are positively and significantly associated with companies' climate change risk responses. Disaggregated analyses show differences in how particular stakeholder groups' pressure affects the corporate response to physical risks. With respect to corporate governance structure, the results demonstrate that female representation on the board of directors and existence of a climate change risk committee facilitate companies' increased climate change risk response. [ABSTRACT FROM AUTHOR]

We assess physical risk associated with floods in Japan, using a dynamic stochastic general equilibrium (DSGE) model. We construct a model that incorporates transmission mechanism of floods and estimate the model using the data of flood-induced damage to capital stock and public infrastructure collected by the government in the last 40 years. The result of the analysis is threefold. First, a flood that reduces the private capital stock by about 0.1% as a direct effect causes GDP to fall by about 0.1% in the first period, with a gradual recovery to pre-flood level. Second, floods dampen GDP through multiple channels. From the supply side, a decline in capital stock inputs and total factor productivity (TFP) reduce GDP. From the demand side, the balance sheets of firms and financial intermediaries are impaired, resulting in disruptions to financial intermediation and depressing GDP. Based on our estimates, all these channels are quantitatively comparable in magnitude. Third, the quantitative impacts of flood shocks on GDP up to now have been minor compared to the standard structural shocks that are considered important in existing macroeconomic studies. However, according to the estimates that use the relationship between the key variables in our model together with climate change scenarios published by the Network for Greening the Financial System (NGFS), the impacts of these shocks could become somewhat larger in the future. [ABSTRACT FROM AUTHOR]

The article reviews the literature on the relationship between climate change and central bank policies. Central banks conduct monetary policy and are responsible for macroprudential supervision. The article focuses on the consequences of transition and physical risks for financial stability and price stability. It also asks what role central banks can play in slowing climate change and what implications climate change has for the future strategy and for the monetary policy framework of the Eurosystem. [ABSTRACT FROM AUTHOR]

The International Monetary Fund (IMF) has been tasked with quickly devising a climate change strategy that helps its members meet collective climate change and development goals while maintaining financial stability. In this paper, we develop an analytical framework of the 'macro-critical' nature of climate change and use that framework to examine the extent to which the IMF has incorporated the macro-economic aspects of climate change in recent years. We deploy textual analysis algorithms to perform a baseline analysis of the extent to which the IMF's main bilateral surveillance activities—Article IV reports and Financial Sector Assessment Programs (FSAPs)—have focused on climate risks between 2017 and 2021. We find that IMF surveillance activity has paid little and uneven attention to climate risks in Article IV reports, and even less so in FSAPs. However, recent Article IV and FSAP assessments have piloted climate risk analyses that present an opportunity to be expanded and incorporated systematically. The analytical framework, baseline analysis, and methodology will allow future analysts to monitor IMF climate performance over time. Key policy insights Multilateral institutions should analyze and incorporate 'macro-critical' climate risks to fiscal and financial systems in their policy frameworks toolkit. The IMF needs to rapidly fill this gap in the climate policy architecture through reforms to its surveillance, advisory, and lending functions. The IMF, as a safeguard of monetary and financial stability, should incorporate climate risks cohesively and comprehensively into its analysis, including spillover or the cross-border consequences of climate change, and reallocate its tools and resources to this end. This paper provides a method and baseline from which to evaluate the evolution of IMF policy toward incorporating climate risk into its bilateral surveillance toolkit, specifically Article IV exercises and FSAPs. [ABSTRACT FROM AUTHOR]

There is growing recognition that natural disasters and severe weather-related events pose risks that can potentially and unintentionally affect the financial performance of the banking system. This study provides further indication that severe weather conditions have an impact on the financial performance of smaller banking units. The paper first constructs a regional quarterly rainfall damage index (RDI) based on data from weather stations across the country. A regional branch-level database from supervisory reports is then compiled based on 11,000 banking units from the Bangko Sentral’s (BSP) Branch Regional Information System (BRIS). Using the dynamic panel generalized method of moments (GMM), we find evidence of a deterioration in branch-level loan growth and loan quality as savings and time deposit liabilities contract and nonperforming loans surge following extreme rainfall events from 2014 to 2018. These are particularly evident in regions most vulnerable to severe rainfall episodes and to branches of universal and commercial banks as well as those of rural and cooperative banks. However, the overall negative impact on profitability seems to eventually taper off. These findings are robust across different specifications and alternative estimation methods such as fixed effects and panel vector autoregression estimations.

In recent years, scholars have published numerous studies dealing with the consequences of climate change for businesses’ activity. However, a more holistic understanding of companies’ perceptions of and responses to physical, regulatory, and market-related climate risks across a wider range of sectors is still missing. To address this gap, this paper provides an empirical analysis of corporate climate risk perception and countermeasures for companies in industries regulated and not regulated by climate policy. Drawing on data from the Carbon Disclosure Project of a size-matched sample of 126 European-based companies, it is shown that most firms feel less exposed to physical and market risks than to regulatory risks. This is because physical risks are expected to materialize in the more distant future and the realization of market risks is considered rather unlikely. Moreover, the results indicate that firms in regulated industries implement more regulatory response measures than firms that are part of non-regulated industries, while, interestingly, there are no significant differences between the two groups in exposure and responses to physical and market risks. By discussing climate-related risks and highlighting the significant role of regulation in spurring corporate action in the context of climate change, this paper holds important implications for corporate managers and policy makers. [ABSTRACT FROM AUTHOR]

• The DICE model is customized specifically to estimate costs to the Canadian economy. • Physical costs due to climate change double under a 5°C versus 2°C warming scenario. • Inflection points occur in 2050 and 2070 when climate damage costs accelerate. • Investments to curb warming more than pay for themselves in terms of avoided costs. The Office of the Superintendent of Financial Institutions, the Bank of Canada, and several key financial institutions recently published a report examining transitional risks to the Canadian economy under various climate change scenarios. However, their results leave an important void with respect to the impact of physical risks and the associated costs of climate change for Canada, such as the loss of biodiversity, sea-level rise, and infrastructure damage due to fires and floods, etc. We fill this void by updating the Dynamic Integrated Climate and Economy model developed by 2018 Nobel Laureate William Nordhaus to project physical damages due to climate change for Canada. Our results illustrate stark differences in physical costs under various warming scenarios, highlighting the importance of taking action to mitigate climate change. We find that undertaking the required investments to reduce greenhouse gas (GHG) emissions more than pays for itself in terms of avoided physical damage alone. [ABSTRACT FROM AUTHOR]